As a business owner, you can be doing everything right with running your business. One day you may open your mail to find an audit notice from the Florida Department of Revenue. While fear may come to mind initially, you know you have done everything right so you are not worried. Once the audit is over, you discover a six-figure assessment. You wonder what happened when you know nothing was done wrong. This scenario plays out with businesses when the Florida Department of Revenue does an audit. It can especially occur when the Department of Revenue uses a 1099-K as the basis of an assessment.
By way of background, the Florida Department of Revenue is constantly exploring ways to obtain information to make assessments against businesses. One method the Florida Department of Revenue came up with was to use 1099-Ks to audit businesses. The 1099-K is a document issued by the credit card companies to show how much the business charged in credit card “sales” for the year. Knowing this and likely considering it low-hanging fruit, the Florida Department of Revenue wanted to get this information but could not force the credit card companies to provide the information. Thus, the Florida Department of Revenue had the legislature enact a law that required credit card companies to provide the 1099-Ks to the Florida Department of Revenue.
Now that the Florida Department of Revenue gets the 1099-Ks, it is not hesitant to use the information to audit good and hardworking business owners. Specifically, the Florida Department of Revenue will compare the “sales” on the 1099-Ks to the sales reported on the sales tax returns for the same period. If the 1099-Ks are higher, then the Florida Department of Revenue assumes the difference relates to sales and are subject to sales tax. There are multiple flaws with the Florida Department of Revenue’s superfluous assumption.
One issue is the 1099-Ks show everything the business collected from customers via credit card sales. While this might include the sale of a taxable item or service, it usually also includes the tips that may have been paid by the customer as well as sales tax collected on the sale. Tips, if certain criteria are met, are not subject to sales tax. Most of the time, businesses automatically meet the criteria for tips not being subject to sales tax. The more disturbing aspect of this is the Florida Department of Revenue’s assessment of sales tax on the sales tax. Sales tax should not be subject to sales tax; yet, it is an issue encountered too frequently.
Another consideration the Florida Department of Revenue does not adequately or correctly consider are nontaxable transactions being included in the 1099-Ks. By way of background, there are three types of transactions – nontaxable, taxable, and exempt. Nontaxable transactions are transactions that are not subject to sales tax. An example would be a car mechanic replacing your radiator when you provide the radiator and all of the needed parts – i.e., it is a labor only transaction. A taxable transaction is one subject to sales tax – i.e., a car mechanic provides the parts and labor to repair your radiator. An exempt transaction is one that is taxable but there is a carveout as to the transaction being taxable. An example of this would be a church having the radiator in its car repaired with parts and labor. The church, if it provides the proper documentation, would be exempt from sales tax on the transaction.
Back to the 1099-Ks including nontaxable transactions. The Florida Department of Revenue will assume all of the amounts are taxable sales. Furthermore, the Florida Department of Revenue will maintain this assumption unless and until the business can prove the sales are nontaxable. Clearly, this is the Florida Department of Revenue either being uninformed and improperly training its staff as to what the law is or the Florida Department of Revenue ignoring the law. Such a position by the Florida Department of Revenue goes against decades of caselaw – as the burden is on the Florida Department of Revenue to prove a transaction is taxable with any ambiguity going in favor of the business. This example is just another instance wherein the Florida Department of Revenue presumes businesses are guilty until prove innocent.
If you receive a large assessment based on this 1099-K issue, it is one you need to be prepared to fight. Auditors believe the assessment is correct based on the assumptions they make. When you go to contest the assessment in the “appeals” area, the appeals area usually believes audit assessments are always correct and the burden is on the business to prove to the contrary. In other words, an assumption is correct until you can provide evidence the assumption is inaccurate – sometimes by having to prove a negative!
There are certain steps a business can take to begin having a fighting chance against the Florida Department of Revenue. One step will be to take the sales reported on the 1099-Ks and compare to the gross sales reported on your sales tax returns for the same period. If there is a difference, see if that difference can easily be resolved by the amount of sales tax reported on the sales tax returns. If you are in an industry where your credit card charges can include tips, then you may wish to review what tips were for that period, by credit card if possible, and then add those amounts to the mix. If there is still a difference, you might have to dive into your general ledge to determine if the sales in your general ledger, accounting for tips and sales tax, match. If not, consider whether nontaxable transactions were reported on the 1099-Ks but not on the sales tax returns. Additionally, it is possible the 1099-K could be wrong, so do not forget to explore that option. All of these can help to mitigate, but not eliminate, your risk.
What if you discover you have a liability? As long as the Florida Department of Revenue has not contacted you, you may still be in luck. The voluntary disclosure program allows an uncontacted Taxpayer to reach out to the Florida Department of Revenue and disclose their liabilities. The voluntary disclosure program can reduce your lookback period to only three years. Limiting the lookback period to three years can be a huge savings for companies with exposure for many more years. Additionally, the voluntary disclosure program can reduce or eliminate penalties. While you will still have to pay the tax and the interest, the savings can be huge overall. The voluntary disclosure program can help you to stop having to worry and look over your should for that audit constantly.
In summary, the Florida Department of Revenue uses 1099-Ks to determine, at least sometimes, who to audit. The Florida Department of Revenue will use the alleged “sales” on the 1099-Ks to compare to the sales reported on the sales tax returns. If there is a material difference, then you would be safe to bet the Florida Department of Revenue will audit your (or your client’s) business. There are certain proactive steps you can take to attempt to begin mitigating your exposure. If you still have a liability after the mitigation attempts, one solution to clean things up would be to enter into the voluntary disclosure program, as long as you can get into the program before being contacted for an audit.
About the author: David Brennan is an associate attorney with Moffa, Sutton, & Donnini, P.A. His primary practice area is multistate tax controversy. David received a B.S. in Accounting and Finance, with a minor in Computer Science, from Florida State University. He worked as an accountant for a CPA firm before attending law school at Regent University. He received his Juris Doctor in 2013 and was licensed to practice law in Florida in the same year. In 2015, David earned his Masters of Laws in Taxation from Boston University. While working for the Florida Department of Revenue as a Senior Attorney, David focused on various sales and use tax issues. You can read his BIO HERE.
At the Law Office of Moffa, Sutton, & Donnini, PA, our primary practice area is Florida taxes, with a very heavy emphasis in Florida sales and use tax. We have defended Florida businesses against the Florida Department of Revenue since 1991 and have over 100 years of cumulative sales tax experience within our firm. Our partners are both CPAs/Accountants and Attorneys, so we understand both the accounting side of the situation as well as the legal side. We represent taxpayers and business owners from the entire state of Florida. Contact us for a FREE INITIAL CONSULTATION to confidentially discuss how we can help put this nightmare behind you.
AUTHORITY
Section 212.02, F.S. - Definitions.
Section 212.05, F.S. - Sales, storage, use tax.
ADDITIONAL ARTICLES TO READ
FLORIDA DOR's 2022 LEGISLATIVE PACKAGE BAD FOR FLORIDA BUSINESSES, published December 29, 2021, by Staff.
IS LABOR SUBJECT TO SALES TAX IN FLORIDA?, published October 4, 2021, by Jeanette Moffa, Esq.
FLORIDA SALES AND USE TAX AUDITS, published September 21, 2020, by Steve Middel.
FL DOR - PROSECUTING CRIMINALLY BASED ON IRS 1099 DATA, published February 6, 2020, by Amanda Levine, Esq.
FLORIDA SALES TAX INFORMAL WRITTEN PROTEST, published November 17, 2018, by James Sutton, C.P.A., Esq.
FLORIDA SALES TAX - VOLUNTARY DISCLOSURE PROGRAM, published April 9, 2018, by Jeanette Moffa, Esq.